JDN 2457223 EDT 16:10.

I'm sure you've heard this notion before: Government debt is “borrowing from the future”. We are “spending our grandchildren's money”, “squandering our children's future”. We are “leveraging our future”. Members of Congress insist that “if American families tightening our belts, government should as well.” Even the New York Times publishes this sort of argument. We hear it so often, I'm not surprised that most people seem to believe that it is basically true.

This is unfortunate, because it is not only false—it's totally nonsensical. We are not borrowing from the future. Unless you've got a time machine, you can't take money from the future and spend it today. That isn't what loans are; that isn't how finance works.

As an individual—or even as a corporation—it can feel like you are borrowing from the future, because excessive borrowing can give you more money to spend today at the expense of less money to spend tomorrow. But you aren't borrowing from the future—you're borrowing from somebody else.

This may seem perfectly banal: Of course you're borrowing from somebody else; where else would you be borrowing from? And perhaps it should seem perfectly banal; sometimes the naive, obvious answer is in fact the correct one. Debt, including personal debt, and corporate debt—and yes, even government debt—is important because, and insofar as, it changes the distribution of wealth. When you borrow and lend, you are moving assets from one person to another. When we scale up to a whole macroeconomic system and all the complexity of global finance, additional issues arise in terms of uncertainty, instability, the propagation of minor mistakes into global catastrophes. Debt can make you not know how much money you have, or who has the money, or what the money is being used for. But debt cannot, by itself, create or destroy wealth—for wealth is not made of numbers in bank accounts. Wealth is made of bridges that stand, airplanes that fly, children that know arithmetic. A single vial of antibiotic contains more wealth than the whole of the world banking system.

For every debtor there is a creditor. Every dollar you owe to someone is a dollar someone else has owed to them. Wealth cannot be created or destroyed this way, only moved around.

Government debt is also not like other forms of debt, for governments have unique powers that others do not have. In particular, they can tax, and they can print money. (When a government cedes its monetary policy to another country via a fixed exchange rate or a monetary union as Greece did to the European Union, it gives up one of its central powers in the economy—and that is responsible for many of Greece's woes today. Greece is in so much trouble now largely because its debt isn't enough like government debt, but instead has been made too much like personal or corporate debt.) Governments have the power to increase or decrease the money supply and thereby control the flow of money. They can pay off debt by raising taxes and reduce the money supply, or they can print money and make their debt lose value by inflation. In this way, governments can manage to run a fiscal deficit indefinitely, spending more than they take in, year after year, and never get into trouble—as indeed the US and the UK have done for decades.

Here is an image is of the US federal budget surplus; notice that it is almost always negative, that is, a deficit.
US federal deficit

An individual could not do that; few corporations could do it either. But a government can—and in fact, typically,
should. A fiscal deficit is necessary to allow both profits and savings to be positive.

Printing money deserves a bit more explanation, because it's something most people are terrified by. “If we print money, won't we end up like Zimbabwe!?” Only if we actually print the ludicrously huge amounts of money that Zimbabwe printed; at the peak they were printing quintillions of Zimbabwe dollars every day. They reached an inflation rate of almost 80 billion percent. Also, one thing everyone seems to forget about hyperinflation is that it doesn't just happen; it's always a policy response to a pre-existing economic crisis, and nine times out of ten that crisis was driven by a war. Hyperinflation can actually be the least-bad option in some cases, and in any case we are in nothing like the situation faced by Weimar Germany and other countries that resorted to hyperinflation.

Printing money is actually a lot like borrowing; in both cases, you increase the money supply. In both cases, if the money supply increases faster than the new money can be spent on genuinely productive activities, there will be inflation. Like any monetary phenomenon, inflation has no real effects by itself—but like debt it can result in redistribution of real wealth as some people end up with more than before and others end up with less. Debt redistributes wealth from creditors to debtors; inflation redistributes wealth from debtors to creditors. Ideally we want to have a balance of the two so that there is little or no net redistribution.

The caveat “faster than it can be usefully spent” is very important; this is why printing money and issuing debt during a recession is not just harmless—it's actively beneficial. When the problem is precisely that spending has stopped and products are piling up on shelves with no one to buy them, creating money and handing it to people will solve the problem. If the new money is immediately spent on real economic activity that otherwise wouldn't have happened, then there will be no inflation; instead, all that new money will be converted into new real wealth. (Theoretically we could have achieved the same economic activity by means of an incredibly sophisticated barter system—but in reality that's basically impossible to do and we invented money so that we wouldn't have to.)

The “bill” for government debt will never “come due”. As bonds expire, new bonds will be issued, and the complete reliability of payments on US Treasury bonds for the last 200 years and counting is one of the cornerstones of the modern financial system. The only thing that could seriously jeopardize it is precisely this sort of panic over government debt. (As FDR put it so well, “The only thing we have to fear is fear itself.”)

Earlier I said that the only way to borrow from the future is to use a time machine, but maybe that's not quite right. There is something else you can do which is like borrowing from the future, in that it increases your wealth today at the expense of reducing it tomorrow—but it has nothing to do with debt.

The way to actually borrow from the future is to pollute the air, burn the rainforest, drain the groundwater, acidify the sea, desiccate the land, depopulate the fish, slaughter the elephants, and melt the glaciers. It is to leave children starving and uneducated, to let bridges crumble and buildings rot. It is to cut research funding to “balance the budget” and leave untold discoveries unmade. Solving these global problems does not require more spending, more “thrift”; it requires more spending, bold actions to invest in humanity's future. We impoverish our future not by spending too much—but by spending too little.

So yes, I suppose we are borrowing from the future. But not the way most people seem to think.

[The image is of the ratio between US federal deficit and US GDP, from the Federal Reserve Bank of St. Louis, https://research.stlouisfed.org/fred2/series/FYFSGDA188S ]

Patrick Julius

Patrick Julius

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